2020 (11) TMI 1111 - AT - SEBI

Fraudulent And Unfair Trade Practices Relating To Securities Market - imposition of disgorgement - taking positions as a hedge in the derivative markets by someone who has an underlying exposure - F O Market amounts to the commission of a fraudulent and manipulative trade in securities in terms of the SEBI (PFUTP) Regulations - Offloading 5% of the shares in RPL by its promoter RIL would cause a flutter in the stock market and would not be in the interest of the investors - short positions taken - differences of views within the three-member Bench. Appellants are prohibited from dealing in equity derivatives in F O segment of Stock Exchanges, directly or indirectly, for a period of one year from the date of the order and shall disgorge an amount alongwith interest @12% p.a. w.e.f. 29.11.2017 onwards till the date of payment Whether the Principal-Agent model/ agency model‛ adopted by appellant no. 1 RIL and implemented with the help of other 11 appellants (because of merger of 2 of the original 12 other Noticees, there are 11 other appellants) in cornering huge position limits in the 2007 November single stock futures contract in the shares of Reliance Petroleum Ltd. ( RPL for short) and the offloading of substantial quantities of RPL shares in the cash segment of the stock exchanges in the last 10 minutes (effectively 8.40 minutes) of the trading hours on 29 November, 2007, the settlement day, allegedly with an intention to artificially depress the price in the cash segment to make larger gains in the future contracts, are violative HELD THAT - As cornering about 62% / 93% of the market-wide position limit by one entity through a manipulative scheme or device is not the same thing as exceeding the position limit by a client in a transparent manner, visible to the exchange/clearing corporation/house. Therefore, the finding in the impugned order that it is a rare case of violation of section 12A of the SEBI Act and Regulation 3 and 4 of the PFUTP Regulations is perfectly in order. Further, it is an established fact that SEBI administers the SCRA, 1956, SEBI Act, 1992, Depositories Act, 1996 and the delegated provisions of the Companies Act, 1956/2013. Therefore, if the nature of the violations specified in any legislations spills over to the mandate under another legislation, SEBI is fully within its rights to invoke the provisions of both/all those legislations. In the instant matter, therefore, when it was held that the position limit violation had been achieved through a dubious, manipulative scheme or a device, such an act would squarely fall within the provisions of SEBI Act and PFUTP Regulations. We, therefore, find no error or mistake on the part of the WTM in invoking the relevant provisions of SCRA, SEBI Act and the PFUTP Regulations, 2003 and in passing the Order under section 11 and 11B of SEBI Act accordingly. Disgorgement is an amount equivalent to the wrongful gain made or loss averted and therefore it is an equitable remedy; not a penal action. Moreover, equity is further served when the disgorged amount is credited to the Investor Protection Fund of SEBI, for the benefit of the market participants, particularly small investors; not to the Consolidated Fund of India as in the case of fine/penalty. Therefore, both the contentions that disgorgement is a penalty and SEBI does not have the power to impose disgorgement under section 11B of SEBI Act are contrary to the expressly stated provisions of the SEBI Act and therefore have no merit and are rejected forthwith. Further, fact that disgorgement of Rs. 447.27 crore ( interest) imposed on the appellant no. 1 is a sizable sum does not make that direction harsh both because (1) it is only a remedial action and (2) what is disgorged is only what has been gorged by contravention of the specified laws. Nothing has been taken out of the appellant s own funds/assets in the process. Since it is only an equitable remedy there is no question of that being harsh or a penal action. Given the aforesaid reasons, appeal lacks any merit and is hereby dismissed. No orders on costs. Appellant no. 1 is directed to make payment of the disgorged amount of Rs. 447.27 Crore along with simple interest calculated at the rate of 12% p.a. with effect from November 29, 2007 till the actual date of payment to SEBI within 60 days from the date of this Order. In view of the majority opinion, the appeal is dismissed with no order as to costs. Appellant no. 1 is directed to make payment of the disgorged amount of Rs. 447.27 Crore along with simple interest calculated at the rate of 12% p.a. with effect from November 29, 2007 till the actual date of payment to SEBI within 60 days from the date of this Order.

Summary

Issues Involved:
1. Whether the dealings in the F&O market amounted to fraudulent and manipulative trade.
2. Whether the sale of RPL shares in the cash segment was fraudulent or manipulated.
3. Whether SEBI has the authority to enforce PFUTP regulations for the alleged violations.
4. Whether the agency agreements violated the Benami Transactions (Prohibitions) Act.
5. Whether the reinvestigation by SEBI invalidates the Show Cause Notice.
6. Whether SEBI is empowered to pass the directions under section 11(4) and 11B of the SEBI Act.
7. Whether the imposition of disgorgement was justified.

Issue-wise Detailed Analysis:

1. Whether the dealings in the F&O market amounted to fraudulent and manipulative trade:
The tribunal found that RIL's act of employing 12 agents to take separate position limits of Open Interest on its behalf and cornering 93.63% of the November Futures of RPL was fraudulent. The tribunal held that the strategy was a pre-planned fraudulent scheme for cornering positions and manipulating the November 2007 RPL Futures market to make unlawful gains. This was not merely a breach of position limits but a manipulation of the market, violating Section 12A of the SEBI Act and PFUTP Regulations.

2. Whether the sale of RPL shares in the cash segment was fraudulent or manipulated:
The tribunal concluded that the sale of 2.25 crore shares in the last ten minutes of trading on November 29, 2007, was done to depress the last half-hour weighted average price (settlement price) to make gains on the 7.97 crore outstanding short positions in November 2007 RPL Futures. This action was manipulative as per PFUTP Regulations. The tribunal found that the trades were genuine sales with delivery and not circular trades, but the timing and manner of the sales were intended to manipulate the market price.

3. Whether SEBI has the authority to enforce PFUTP regulations for the alleged violations:
The tribunal held that SEBI was empowered to take enforcement action for PFUTP against the appellants. The tribunal found that the manipulative scheme involving the principal-agent model and cornering a substantial portion of the market-wide position limit was a violation of SEBI Act and PFUTP Regulations. The tribunal emphasized that the SEBI Act and PFUTP Regulations are applicable when there is manipulation or fraud in the securities market.

4. Whether the agency agreements violated the Benami Transactions (Prohibitions) Act:
The tribunal did not find the agency agreements to be benami contracts or in violation of the Benami Transactions (Prohibitions) Act. The agreements were disclosed by RIL during the investigation, and the tribunal focused on the fraudulent and manipulative nature of the transactions rather than on the legality of the agency agreements under the Benami Act.

5. Whether the reinvestigation by SEBI invalidates the Show Cause Notice:
The tribunal rejected the contention that the reinvestigation by SEBI without any new ground or fresh material invalidates the Show Cause Notice. The tribunal held that the reinvestigation was based on the replies filed by RIL and was necessary to gather comprehensive evidence against all the appellants.

6. Whether SEBI is empowered to pass the directions under section 11(4) and 11B of the SEBI Act:
The tribunal affirmed SEBI's power under section 11(4) and 11B to pass directions, including disgorgement, in the interest of investors and the securities market. The tribunal held that SEBI's directions were remedial and not punitive, aimed at protecting market integrity and investor interests.

7. Whether the imposition of disgorgement was justified:
The tribunal upheld the disgorgement order, directing RIL to disgorge Rs. 447.27 crore along with interest. The tribunal found that the profits made by RIL through the manipulative scheme were unlawful gains that needed to be disgorged. The tribunal emphasized that disgorgement is an equitable remedy to prevent unjust enrichment and restore market integrity.

Conclusion:
The tribunal dismissed the appeal, upholding SEBI's findings of fraudulent and manipulative practices by RIL and the other appellants. The tribunal directed RIL to disgorge the unlawful gains along with interest, reinforcing SEBI's authority to enforce market regulations and protect investor interests.